Though the cloud computing sector has seen generous growth over the last five years, some analysts have wondered if the market is overvalued. However, there is no simple answer to this question, as the concept of cloud computing can refer to any number of companies that provide an offsite technical solution for customers. With the industry’s potential projected to grow to $2.3 trillion by 2032, it’s important to know which cloud computing stocks to sell and which to buy.
Currently, some business analysts believe the future of cloud computing is industry-specific, meaning that the companies with lucrative niches are likely to go the furthest. It also means that companies with less adaptable and relevant business models over time are likely to suffer long-term. Thus, the three stocks mentioned in this article might have upsides in the short term but are likely to remain stable as the cloud service industry progresses.
Workiva (WK)
When looking at the big picture regarding Workiva (NYSE:WK) the stock is up 56% over the last five years. This is despite its lack of profitability over the same time frame and reality might finally be catching up to it. The company’s cloud-based software is essentially a one-stop shop for financial reporting, audit preparation and risk management and has been the focal point of the hype around Workiva.
There are two ways of looking at the company’s current trajectory. First, the company could be undergoing a period of price correction, as many of the cloud-based and computing-centric companies are now under the microscope due to whispers of an artificial intelligence bubble. Second, the company could be overvalued and in a generous downturn as it continually struggles to generate income.
Though its software-as-a-service model can be lucrative over time, its original investors could lose patience soon. Thus, it might be best to start considering Workvia as one of the cloud computing stocks to sell.
Zoom Video Communications (ZM)
For a brief moment during the remote-work paradigm of the COVID-19 pandemic, it seemed like Zoom Video Communications (NASDAQ:ZM) was the future of productivity. After all, between 2020 and 2021, nearly everyone’s remote working experience involved the company’s video call application. Yet, the reality of market saturation might be setting in for ZM stock as the company faces a stagnating market for video call software.
Beyond the market slowdown, Zoom now faces major competition from established industry giants like Microsoft (NASDAQ:MSFT) and Cisco Systems (NASDAQ:CSCO) with their respective Teams and Webex software. Thus, the company’s stock could be approaching another selloff wave as investors recognize its uncompetitive position.
Moreover, if you were one of the investors who had initially invested in the stock during its peak run in 2020, there’s likely no chance of seeing performance like that again. These days, Zoom is a shell of its former self simply because it faces competitors who can price video call products more competitively due to diversification.
Zscaler (ZS)
This last pick is somewhat mercurial in terms of potential, as it relies on a very specific subset of business to prosper amidst a period of tumultuous growth. As a cloud cyber-security company, Zscaler (NASDAQ:ZS) could have a long runway ahead of it or a slow decay.
Currently, the stock commands strong buy ratings from several analysts. However, its overvaluation looms. This is based on factors such as repeated quarterly losses amidst an increasingly competitive market with competitors like Oracle (NYSE:ORCL) and Palo Alto (NASDAQ:PANW).
Moreover, Baird recently adjusted its price target from $265 to $260. While not an excessive decrease and still representing an outperformance rating, it does signal caution ahead of Zscaler’s next earnings report. Thus, the best time to sell could be after its Q3 earnings report, should investor optimism continue to drive the stock up before a correction cycle.
On the date of publication, Viktor Zarev did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.